What’s Really Killing the Housing Market?

Question

If you ask an economist why housing is ‘unaffordable’, you’ll hear, “We don’t have enough supply.”  That’s not the only factor, but it is apparently true

When you ask regular folks, the answer is very different.

A Bright MLS survey of 3,200 consumers, states more than 55% said the real problem is that people simply do not make enough money. Another question's response is 50% said mortgage rates are too high.

That tells me something important. The market is not just dealing with supply issues, it’s dealing with a monthly payment problem.

A buyer may want to buy, may have decent credit, they may have money saved. But once they add the mortgage payment, property taxes, insurance, utilities, repairs, and regular cost of living, well, the math just stops working.

That’s a big disconnect: ‘professionals’ talk about inventory, but consumers talk about survival.

The age split is interesting too: younger buyers are often frustrated because homes are not being built where they actually want or need to live. And older buyers / owners are looking at something else-- property taxes, homeowners insurance, and the rising cost of simply holding onto a property.

That helps explain why the market feels stuck to me.  Younger buyers just can’t get in as easily as a few years ago, and older owners are not that eager to move right now. Sellers are locked into old rates. Buyers are staring at payments they don't trust.

For most of us as small investors, the takeaway is simple: do not underwrite deals based on the market you wish existed—we must use today’s numbers—the real rent, taxes, insurance, higher costs of maintenance, vacancy, and of course, the real-after-everything cash flow.

I believe we’re in the “New Normal”, so let’s not assume rates are going back to 3%.  Do not assume appreciation will bail you out.  And please, don’t assume rent growth will fix a weak deal.

There may still be opportunity in this market, but it is not very forgiving. I believe the folks who do well will be the ones who stay disciplined and let the numbers speak the truth.

What do you think is the biggest issue right now: wages, rates, taxes/insurance, or lack of supply?

Marc Winter · Answer

@Henry

@Henry Clark,  "Federal Reserve Bank who are not elected officials and whose members are from large bank institutions are allowed to create currency.  Over the years this has caused ongoing inflation."

Just to address the quote above:  The Fed does not create currency or money.  The Fed only has control over short-term, overnight rates, ie bank-to-bank lending.  The Treasury  'prints' (creates) money in the form of selling bills, notes, and bonds.

We live in a debt-based system.  Money is created by banks making loans with interest.  They purposely make it as confusing as possible so we the people don't know where to look.  SMH.

Simon Asselin · Answer

What I'd stress also is to make your own estimates for these figures, rather than taking the seller's figures to the bank so to speak.

If you underwrite or operate enough properties, you will start to get a sense of reasonable cost ballparks, and how much certain categories are expected to drain your profit as a % of gross income (e.g. repairs and maintenance is a good example of this and one you can easily scale up and down based on age and condition you are looking at).

For property taxes, remember to be aware of the (re)assessment cycle for the county of the property you're looking at, and estimate the amount of taxes you're likely to pay after taxes get reassessed from the sale of the property. In certain cases this could mean a significant jump in your costs as the property readjusts from a legacy or dated assessment pre-sale.

Drew Sygit · Answer

The same problem exists with "affordable rentals"!

An increasing percentage of tenants have 50% or more of their income going towards rent, when traditionally it's been closer to 40%.

Yet, we consistently see the following on Class C rental applications (much on applicant bank statements):

1) Weekly spending on eating out2) Weekly spending on DoorDash, GrubHub, etc.3) Seeing a spike in online sports betting4) Weekly spending on personal grooming5) Living with relative, but NO SAVINGS PATTERN!

Yes, there are income disparities, but there are also cultural spending and work ethic issues.

Chris Seveney · Answer

People live above their means. recent study came out that said those who make more then $200k like 40% are paycheck to paycheck. Issue is people want 3,000sf home in a beautiful cul de sac right next to a major city with every amenity under the sun and then want it for entry level price. When I started work my first house was 65 miles from boston as that is what I could afford and I started out and was making good money for my age as an engineer.

Henry Clark · Answer

OP.  None of the above.  We are in a death cycle with our National Debt both the $39T and the $138T unfunded.

Federal Reserve Bank who are not elected officials and whose members are from large bank institutions are allowed to create currency.  Over the years this has caused ongoing inflation.

There is no correction to the items you noted.  All of them will continue to increase outstripping wage increases.

Owning cash flowing assets with no debt or rents that you can increase and with sustainable tenants with debt are your only safe options going forward for the next day 20 years until the debt and the Federal Reserve system unwind.